IR35 and your supply chain – what’s the risk?

Last week we highlighted an issue with IR35 compliance - an important one for HR professionals to be alive to. In our programme ‘IR35 uncertainty prevails with complex supply chains’ tax specialist Penny Simmons explained how there remains a lot of uncertainty around the issue of whether a supply is ‘full contracted out’ and therefore the identity of the client bearing ultimate responsibility for compliance. We are returning to this issue to address an obvious question – what if the end user fails to spot that problem? What’s the risk if you get this wrong? We will come on to that shortly but first a reminder of these tax rules.

IR35 is essentially an anti-avoidance rule targeting the use of “personal service companies” (PSCs) to avoid employment taxes. Broadly, where an individual is engaged ‘off-payroll’ and through a PSC the individual can achieve employment tax savings, whilst the engaging business is not required to pay employer national insurance contributions, currently at 13.8%. The basic premise of IR35 is that when a business engages with an individual through an intermediary such as a PSC, if the individual would have been considered to be an employee for tax purposes if they had engaged directly with the business, then the individual should be taxed as an employee. Under the previous regime, the PSC was responsible for assessing the tax status and paying any employment taxes if arrangements were deemed to fall inside IR35. However, in response to widespread non-compliance, the Government decided to shift responsibility for the assessment to the business engaging the PSC Contractor, often referred to as the engager, or end-user. The new regime for the private sector came into force in April this year.

Understandably, in the lead up to April, most businesses were focussed on the basics of IR35 compliance. So, making sure they had in place IR35-compliant onboarding processes and completing large numbers of status determinations. It’s now June and, as the dust settles, businesses are turning their attention to their supply chains and the thorny issue of who bears responsibility for taxes. 

So, back to the key question, what’the risk here? To help with that, tax specialist Penny Simmons again: 

Penny Simmons: “So this is a question that I am being asked a lot. In fact, the issue of who's the client between businesses and service providers is a very live and very current issue that I am dealing with on a weekly basis, and the big question is, what's the risk to me? It’s an interesting question. So, if the  business and the service provider look at the IR35 issue, and they say, well, actually, we think the service provider is the client for IR35 purposes and we've got this group of off-payroll workers who are being provided to deliver some of those services, and the service provider goes away and says, well, actually, those individuals are engaged through limited companies, we're going to make IR35 status term determinations and issue status determination statements and, if they're within scope of IR35, we are going to make sure that the taxes are paid. Now, what happens then if actually the Revenue looks at this arrangement between the business and the service provider and says, well, I don't actually agree with you, I think the business was the client for IR35 purposes? Now, if taxes have been paid and all the status determinations and status determination statements have been correctly made, and correctly issued, then the reality is, what is the risk here because from a financial perspective there shouldn't be any tax to pay because the tax has already been paid. Now, the real risk is if the service provider takes a different approach to the approach that the business would have taken to making those status determinations and this is where the problem becomes full circle, because, as you all have heard me say before when we've spoken before, Joe, I've talked about the fact that employment status for tax purposes can be a very complicated test, it’s based on factors, there's no specific definition. So, it is possible, and we know it's possible because we know that the Revenue’s tool can give rise to different answers as to whether somebody is an employee for tax purposes or not, using the same set of circumstances. So, we know that the test is complicated, we know that different answers can arise, so on that basis it is not outside the realms of possibility that the service provider could make status determinations and come to a different result as to the status determinations that the business would have come to if they had taken on that responsibility and accepted the responsibility as the client. So, on that basis it is therefore possible that if the Revenue were to look at an arrangement and say, well, we don't think it's the service provider that is the client for IR35 purposes, we think it should have been the business, that was having those services supplied to them, and having that labour supply to them, and not only do we think that the business was the client, but we think those status determinations of wrong that were made by the service provider, we think the status determinations are wrong and, actually, we think that there are contractors who are inside of IR35 when the service provider determined that they were outside IR35, so we think that tax hasn't been paid when it should have been paid. Then you get to the problem of, well, hang on, if it's the business that's that should have been the client then the business should have made those status determinations and the business, therefore, would then be responsible for paying taxes that the Revenue would say haven't been paid. So, there is a real risk here that the business could be on the hook for employment taxes and national insurance contributions if the Revenue disagrees with the determinations made by the service provider and, not only disagrees with those determinations, but also disagrees with who the client is.”

Penny has written about this issue in some detail for Tax Journal – it’s called ‘IR35: the prevailing uncertainties’. You will need to subscribe to Tax Journal to be able to access the full article but, in case you want to do that, we have put a link to the relevant web page in the transcript of this programme.

LINKS
- Link to Tax Journal article ‘IR35: the prevailing uncertainties”